You are considering buying a new SUV for your late-night beer delivery service.

Question

You are considering buying a new SUV for your late-night beer delivery service. The SUV will cost $25,000, with a salvage value of $5,750 after five years. The vehicle will be used to travel 30,000 miles per year. You expect to have a yearly income of $100,000 based on the business plan. On average, the SUV yields 21 miles per gallon and fuel price is estimated at $0.65 per liter. Other O&M costs associated with the business total $40,000 per year including labor, repairs, insurance, etc. Your company’s MARR is 18%. Use a five year planning horizon.

a. Provide a detailed formula (using the factors) to compute the PW for this vehicle. Provide the PW of this project and comment on its desirability.

b. Create a single Spider Diagram that shows the PW effect of varying all the information provided in the problem (one variable at the time) as the one presented in your manual.

c. State if each input data varied in part b affects the PW in a positive or negative way and if you consider the PW to be sensitive to that input data or not.

Explanation / Answer

B.) For this change every value to get the new NPV everytime.

C.) Increase in cost will decrease the NPV and vice versa. Also increase in Revenue will have the same effect

Depreciation can be calculated by using this formula Depreciation = (Cost of SUV - Salvage value) / number of years Here, Cost of SUV = $25000   and Salvage value = $5750 Number of Years = 5 Depreciation = ($25000-$5750) / 5   = $3,850.00 It is given that the vehivle will run 30000 miles per year and the milage of vehicle is 21 miles per gallon Therefore gallons og fuel consumed during a year = 30000/21 = 1428.571 Cost of fuel = $0.65 per gallon x 1428.571 = $928.57 Other costs = $40000 per year Initial Cost $25,000 Year 1 2 3 4 5 Revenue $50,000 $100,000 $100,000 $100,000 $100,000 Cost of fuel $928.57 $928.57 $928.57 $928.57 $928.57 Other costs $40,000 $40,000 $40,000 $40,000 $40,000 Depreciation $3,850.00 $3,850.00 $3,850.00 $3,850.00 $3,850.00 Profit(revenue-cost of fuel-other cost-depreciation) $5,221.43 $55,221.43 $55,221.43 $55,221.43 $55,221.43 Cash Flows(Profit+depreciaton) $9,071.43 $59,071.43 $59,071.43 $59,071.43 $59,071.43 a.) PW of Vehicle = Net Present Value at 18% MARR = $117,353.58 Considering the NPV of this project we should accept it.

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